The residential mortgage industry has seen some significant changes over the past few months, and we are left to adapt to a new norm, once again. The COVID-19 crisis has been a stress test, of which, I believe, companies operating here have passed, particularly mortgage servicers. That may be because the mortgage servicing industry has been no stranger to rapid changes since the end of the Great Recession.
Before the financial crash, financial institutions were mostly free to work with any firm they chose. Like any other business, poor vendor choices negatively affected profitability and increased risk. After the financial crisis, everything changed. This is partially why the Consumer Financial Protection Bureau (CFBP) was created under the Dodd-Frank Act to ensure that mortgages maintain transparency and fairness for the consumers.
The CFPB became the industry’s new regulator and began its work of making the mortgage process less opaque for the borrower; it rebuilt the disclosure documents that borrowers would receive after making an application for a new home loan and before the loan was closed.
CFPB’s TILA/RESPA Integrated Disclosure program forced the industry to synchronize all third parties to loan originators to provide accurate information to borrowers. The process was expensive and time-consuming, but it was money the industry spent because the cost of non-compliance was very high, and CFPB made it very clear that any mistake a vendor made was held against the lender.
On the servicing side of the business, during the foreclosure crisis, the government had also established regulation to oversee the nation’s mortgage servicers and their processes. Here, too, the financial institution was held responsible should any compliance mistakes be made.
By 2012 when the CFPB issued Bulletin 2012-03, the government’s expectations related to the engagement of third-party service providers were made abundantly clear. The Federal Reserve Board, the OCC, FDIC, and FFIEC supported its rules. The nature of the business had changed forever.
CFPB and the other regulators required financial institutions to put sourcing and vendor management programs in place to manage non-compliance risk in their guidelines to the industry. Here we saw the expansion of these departments and the shift of the decision-making process.
When the dust from the financial collapse of 2007 cleared, many institutions had Vendor Management and Sourcing departments established. They were required to document that they were actively managing their vendor relationships and holding vendors accountable for keeping pace with the changing rules that governed the industry.
Because these changes affected how financial institutions managed their vendors, they naturally changed how they sourced and engaged them. In the process, it disrupted the way industry vendors approached the sales process. Sophisticated sales specialists and subject matter experts were now selling to sourcing and vendor management personnel and not the business unit itself. The business unit shifted from being the decision-maker to being an influencer at best. This had benefit but also led to unintended consequences.
We began seeing significant changes in the way our prospects and customers operate within NTC’s lines of business, providing services for Lenders, Servicers, and Investors. Instead of working closely with established operational business unit contacts that our front line business development experts have worked with for many years, we are encountering Sourcing and Vendor Management departments.
Requests for pricing (RFP) and Requests for Information (RFI) were leaned on heavily to present the best solutions for the least amount of money. While not a new concept in our industry, these were becoming more common due to an initiative to consolidate outsourced services to a smaller number of vendors and to lower operational overhead.
The average cost to service a loan skyrocketed, and it was time to make up the difference with efficiencies. Contributing factors were a substantial increase in the cost to onboard and or manage a vendor to the requirements and standards being forced on them. Because of this, there was a push to “consolidate” services and eliminate vendors by as much as 50%. Critical/complex processes were moved from specialists to other, less qualified vendors.
Despite the effort to reduce the number of vendors, there was increased demand for more robust Disaster Recovery and Business Continuity programs (DRBC), which often meant more vendors, catch 22.
Many RFP’s and RFI’s written by newly established sourcing personnel had little chance of developing an “Apples to Apples” comparison of service to be provided from one vendor to the next. Without a detailed discussion of problems, complexities, and proven solutions between subject matter experts on each side of the table, the chances of coming up with the best solution with the minimal risk at the best price were slim.
In addition, new scorecards were implemented to show the effectiveness of a vendor in compliance and not always appropriate for the services provided. This made it a challenge to not only indicate if the vendor was doing a good job or not but also made it very difficult to find areas that could use some improvement pro-actively. When a scorecard becomes a standalone source of information on the quality of a vendor, it usually falls short. If the CEO asks the department head how a vendor is performing, they would likely get a detailed and nuanced answer. If all the CEO reviews a vendor scorecard, there is little context for the scores the vendor received and why.
New business requirements were also being demanded of each vendor in line with the qualifications they had to adhere to. These were not always pertinent to the services being provided, causing additional unnecessary expenses and allocated resources for the vendor. For instance, one servicer’s RFP wanted to ensure that our employees were trained on bank branch office guidelines, such as knowing how far an accessible parking spot should be located from an Automated Teller Machine. Even though this has nothing to do with the service we provide, it was still a guideline they wanted us to follow.
Champion-challenge scenarios against competing vendors for a “lions share portion” of the work being outsourced seemed to be more frequent and even encouraged. The increased demand for more DRBC likely drove this. This made it challenging to forecast volumes and plan on personnel resources needed, which is vital to ensure you are pricing a service correctly and allocating enough personnel to deliver the product.
I have seen this destroy good vendor relationships and preserve dysfunctional ones that should have been discontinued.
How do you sell complex services and solutions using an established business development approach that has worked for you for many years with all these challenges?
Any vendor that was going to be successful had to adjust the sales, account management, client services, compliance, security, and delivery processes to conform to the new norm.
- Rule one is always to know your audience. Salespeople must become experts at finding out all they can about each person they speak to, determining where they fit in today’s financial services company. Today, the person will be a sourcing manager who is an expert at reducing the number of prospective vendors to a handful. They will be finding the best price but could be less adept at knowing precisely what the business unit will require from the vendor who wins the business.
Likewise, management requires different information than operational executives. Providing incorrect data to either of these parties will fail to advance the proposed deal. In many cases, talking to executives in either of these groups before establishing a relationship with sourcing could be a severe mistake.
- Establish relationships with vendor management and sourcing departments in addition to the business units and upper management levels. Play by their rules, and do not go around them.
- Proposals have to assume correctly what and whom you are selling against. This information is not shared in today’s environment. One has to be a subject matter expert to make the correct assumption. Knowing who your potential competitors are and how they will answer each question on an RFP or RFI is a considerable advantage.
- The cost to onboard a company or to continue managing as a vendor has to be justified as part of any cost analysis.
- Clearly show how your company is going to be a secure, compliant, and cost-effective business partner to work with and manage.
- The prospect’s financial and reputational risk associated with the service in question should be identified and shown that the risk will be reduced, if not eliminated, by outsourcing or switching over the business to you.
- Creating a useful vendor scorecard is a skill that requires an in-depth knowledge of the needs of the department the vendor serves and the product or service the vendor delivers. Knowing what constitutes a job well done is not as simple as it sounds.
- The proof has to be in the pudding once work is started. Have an account management team of experts take over after a sales process to ensure the best possible setup, delivery, and care for the client and their line of business. This will help guarantee you get the lion’s share of the work if in a champion challenge situation.
- Operations have to continue to find efficiencies through process improvements and technology to keep overhead down and quality up. This allows the pricing to remain competitive and maximize profitability.
- Partnership! Establishing your company as a business partner is a far better situation than any “client/vendor” relationship. Help them improve their processes upstream or downstream from the work you are doing for them, even if it does not contribute to more business.
There is a lot more than just sales in all of this. If you do not have everything else in place, the sale is meaningless. You will not have a happy client in the end, and you may not have a client at all. We have found it imperative to have a seamless, coordinated flow from an opportunity to a proposal to a close to setup/management and then finally handed to operations for delivery. These are all efforts that have contributed to NTC’s year after year growth despite the industry difficulties we have experienced in the past 12 years. Vendor Management and Sourcing Departments are quickly becoming subject matter experts themselves, across all business lines. So things are getting better, and the right people are hired for the job resulting in better processes.
# # #
About the Author
Danny Byrnes is the Vice President of Sales and Marketing at Nationwide Title Clearing, Inc. Byrnes joined the company in 2011 and spent a very successful two years as the firm’s Director of Sales before being promoted to Vice President of Sales in 2013. He has since helped broaden the scope of services offered by initiating and customizing solutions for clients. His experience and knowledge of complex sales, sales management, marketing, and product management are invaluable to NTC. Byrnes also has deep technology sector aptitude, having spent nine years in the industry as a sales executive and successfully running sales teams for several specialty software companies. He has over 30 years of sales experience across several sectors, including the entertainment industry, where he worked as an agent/manager for some of the world’s most significant musical acts for 15 years.